Impact of Environmental, Social, and Governance on Innovation in Chinese Listed Firms

Abstract

As awareness of sustainable development has increased, the corporate advantages of ESG (environmental, social, and governance) have attracted widespread attention from investors, and research has demonstrated that ESG has a sustained impact on long-term business operations. At this new stage of market development, the relationship between ESG rating performance and corporate innovation is worthy of in-depth study. The effect of corporate ESG rating performance on innovation based on stakeholder theory was tested using data from Chinese A-share listed companies from 2009 to 2021. The results show that ESG rating performance can significantly improve corporate innovative output and R&D (research and development) investment. This promotional effect is more significant in large enterprises, state-owned enterprises, and companies in the eastern region of China. ESG rating performance promotes corporate innovation by improving firm financial performance and expanding internationalization. In addition, ESG rating performance not only increases the quantity of innovative output, but also helps to improve the quality of R&D investment. ESG strategy, standardized and mandatory disclosure of information pertaining to ESG, improved quality of information disclosed, and promotion of corporate innovation are all necessary to help enterprises develop in this new era.

1. Introduction

With the multitude of problems related to climate change, wealth disparity, unemployment, and environmental damage [1], sustainable development is becoming an increasingly important issue in businesses worldwide. Increased corporate social responsibility prompted by research on sustainable development has reshaped the strategic planning of many firms. The acronym ESG (environmental, social, and governance) first appeared in the United Nations’ Who Cares Wins report of 2004, which argued that integrating environmental, social, and corporate governance factors into capital markets makes good business sense, and can lead to much more sustainable markets and better social outcomes. For sustainable development, ESG is used to measure corporate credit [2], achieve sustainable development goals [1,3], quantify the environmental and societal impact on firm, and assess the sustainability of development plans and new opportunities for business growth [4,5].

While firms’ ESG performance ratings have attracted widespread international attention, most enterprises in the emerging economies are still reluctant to disclose information regarding their ESG [6]. China’s sustainable development goals are to peak carbon dioxide emissions by 2030 and to achieve carbon neutrality by 2060. To realize these goals, integrating social, environmental, and governance factors into enterprise strategy is necessary; in addition, Chinese firms may help to address global social issues at the micro level [7]. Economic transformation in China may, in fact, depend on it. Despite this, in fact, less than 30% of listed companies in China had released ESG reports [8]. However, as the demand of sustainable and green development increases, more and more Chinese companies are actively disclosing their ESG reports and related data.

Much research has discussed the economic impact on businesses of ESG and sustainable development strategies [9]. ESG can help companies overcome intangible barriers such as environmental concerns or the scrutiny associated with the investment process [10,11]. Disclosure of ESG information can enhance firm transparency and cultivate a favorable social image [12], which can ease financial constraints [13], boost operational performance, reduce litigation risk [14], strengthen defenses against downside risks [15], improve audit quality [16], enhance market value [17], and increase stock returns [18,19]. From a corporate finance perspective, the (mostly positive) impact of ESG on company value [20,21], profitability [22], financial constraints [23], financing capability [24], innovation capacity [25], and risk management capacity [26] has been examined. The role of ESG performance in the process of firm internationalization has also been investigated; the contribution of ESG in this process is undeniable [27,28].

Research is divided on the impact of ESG rating performance on enterprise innovation and development. Although studies based on neoclassical theory suggested that ESG ratings do not promote corporate operational performance, but instead may prevent maximization of corporate value due to their strong externality [29], other studies demonstrated that in information asymmetric environments, ESG can help firms win the trust of stakeholders such as suppliers, customers, and financial institutions, thereby reducing operating costs and improving operational efficiency [30]. There is a significant positive correlation between ESG performance and corporate reputation, effectively improving firm competitiveness [31]. Secondly, ESG has a positive impact on innovative performance. According to stakeholder theory, companies should take social responsibility for and maintain sustainable relationships with stakeholders such as employees, customers, suppliers, and creditors [32]. Lin et al. [33] pointed out that Freeman’s stakeholder value maximization perspective, proposed in 1984, posits a positive impact of ESG on innovative performance. In fact, increasing engagement in ESG activities can improve relationships between firms and their various stakeholders, such as governments, local communities, customers, and even competitors. Good relationships with external stakeholders are beneficial for companies, helping them to obtain valuable external knowledge and information [34], which can encourage them to increase innovative activities and improve their innovation capacity [35], which in turn is conducive to improving production efficiency and reducing production and operational costs. Jiang et al. [4] found that enterprise participation in ESG activities reduced information asymmetry between firms and their external stakeholders, thereby lowering creditors’ perception of risk and enabling lower returns to suffice. Investors’ recognition of ESG is also increasing [18,36]. Companies that engage in ESG activities are better able to satisfy stakeholders’ demands [37], gain higher operating income [38], obtain better corporate commercial financing, and achieve better business credit ratings, thereby improving investment efficiency and corporate performance [15,39,40,41,42,43].

Studies based on stakeholder theory and signaling theory (which is rooted in stakeholder theory) asserted that ESG ratings alleviate information asymmetry [44]; however, rating differences may indicate contradictory performance information, negating these anticipated benefits. Therefore, some firms with inadequate internal governance or lax external oversight may realize ESG ratings to be harmful. To achieve higher ESG ratings, some firms would embellish their efforts in terms of environmental protection and resource utilization in their ESG reports, even making commitments that are difficult to fulfill; this is known as ‘greenwashing’. Furthermore, the potential information-spreading effect of ESG ratings may evolve into an information-concealing phenomenon, whereby managements of firms utilize ESG information to distract investors’ attention from poor financial performance.

Relatively few specialized studies have been organized on the relationship between ESG performance and enterprise innovation. Most empirical analyses have focused on technological innovation, suggesting that better ESG performance increases firms’ technology level and improves innovative performance [13,45,46]. While the impact of ESG performance on enterprise technological innovation has been adequately studied, research on its influencing mechanisms remains inadequate. This paper focuses on the impact of ESG performance on enterprise innovation. In this paper, we utilize the patent data of Chinese A-share listed enterprises and data from the Huazheng Certificate ESG ratings to analyze the relationship between corporate ESG performance and innovative output. We also examine potentially influential mechanisms from two perspectives: corporate financial performance and the level of internationalization. Our empirical tests demonstrate that ESG can promote an increase in corporate innovative output, especially in large and state-owned enterprises, where this relationship is particularly prominent. In addition, ESG strategy can improve firm finances, thereby promoting more investment in R&D. Finally, ESG performance helps to accelerate internationalization; as internationalization increases, competition also increases. Therefore, investment in and output of R&D continue to increase accordingly.

Compared with previous studies, the contributions of this paper are as follows: First, based on stakeholder theory, we focus on the impact of corporate ESG performance on innovation in Chinese listed enterprises. This not only expands our knowledge of the factors driving corporate innovation, but also extends the literature related to ESG and corporate performance. Previous studies found that many stakeholders influence the constraints on resources for innovation and risk-taking of enterprises, or discussed the impact of ESG on financing constraints, firm investment, and market value [20,21,30], but research is needed on the impact of ESG ratings on corporate innovation. We discuss this issue using patent data of A-share listed companies and data from the Huazheng Certificate ESG ratings, expanding our understanding of the influence of stakeholders on firm innovation and the economic consequences of ESG. Second, our analysis reveals the mechanisms by which ESG influences corporate innovative output from two perspectives: corporate finances and the extent of internationalization. Due to the high costs of innovative projects, firms engaging in innovation require more financial support compared to those developing their physical capital. The impact of ESG on corporate financial performance and value has been addressed in many studies [15,39,40,41,42,43], but no analysis of the influence of ESG on firm innovation, capital investment, and international behavior of enterprises has been conducted. We identify the mechanisms of ESG in promoting corporate innovation from a new perspective, that of stakeholder theory. Third, due to deglobalization, the COVID-19 pandemic, and China–US trade friction, Chinese companies have had difficulty in developing international markets and faced certain obstacles to corporate innovation. ESG ratings may help or hinder the progress of a company’s internationalization and innovation. This study elucidates this question.

This article is arranged as follows: part two provides theoretical background and presents our research hypotheses; the third part outlines our empirical strategy and the descriptive statistics of our sample; part four lists the results of the baseline test and robustness analysis; part five describes the heterogeneity analysis; part six presents the mechanism test; finally, we draw our conclusions and make several policy recommendations.

2. Theoretical Background and Research Hypotheses

2.1. ESG and Corporate Innovation

2.1.1. Firm Objectives

In traditional mainstream economics, it is believed that the sole business objective of a company is to maximize its value. Innovation is one of the main means to extend the corporate life cycle and thereby obtain abnormal economic profits. However, in the modern management model where ownership is separated from control, there are often principal–agent problems between owners and managers, primarily due to factors such as information asymmetry between them. In addition, innovative projects are usually associated with long cycles, high costs, and high uncertainty. Due to reputational considerations or performance assessments centered on short-term profits, managers tend to prefer risk-averse, conventional investments; incentives to engage in somewhat risky innovative projects that may or may not contribute to long-term corporate development are insufficient. Similarly, under information asymmetry, investors and financial institutions cannot effectively supervise major shareholders or management. They are also intolerant of corporate risk, tending to invest in low-risk conventional projects with short cycles [47].

Stakeholder agency theory [48] argues that stakeholders’ needs are also among a company’s principal objectives, and when their demands are met, internal agency problems will be alleviated. As the basic function of the board of directors is to supervise and check agents, this theory also assigns a fundamental role to the board of directors, that is, to be responsible to stakeholders and ensure that the company pays attention to and implements sustainable development practices. ESG, as a comprehensive system of evaluation, is a suitable criterion for assessing the health and sustainable development of firms [49] that is highly regarded by many stakeholders.

2.1.2. Balancing Value

Engagement in ESG activities involves certain costs and externalities. Researchers have asked the special question, is there a conflict between ESG investment and firm economic interests? Unlike the view of the neoclassical school that ESG hinders maximization of corporate value, stakeholder theory posits that prioritization of ESG shifts corporate goals from maximizing corporate value to balancing economic and social value. The interests of consumers, suppliers, employees, managers, owners, and even the general public can all be considered. Essentially, ESG entails integration of corporate relationship networks and development resources to improve the level of innovation [50]. The rationale is as follows: First, engagement in ESG activities shifts the goal from maximizing firm value to taking into account both economic [9] and social values, which helps to build trust in uncertain environments. Zuo et al. [51] suggested that a company’s engagement in socially responsible actions can meet employees’ needs for self-actualization. This not only attracts creative employees, but also increases trust, makes the division of labor within companies more efficient, forms a virtuous cycle of internal and external resources, and promotes innovation. Engagement in ESG activities also facilitates the accumulation of social capital and development of cooperative commercial networks, thereby reducing business risk and alleviating resource constraints during the innovation process [52]. Second, prioritizing ESG can alleviate principal–agent problems and increase the tolerance of stakeholders to risk-taking. High-risk innovation and performance evaluations centered on short-term profits reduce managers’ incentives to invest in innovative projects, while good corporate governance systems promote the alignment of interests between managers of firms and shareholders, enhancing managers’ willingness to take risks. At the same time, because of the positive signals conveyed by engagement in ESG activities, external stakeholders are more likely to attribute the failure of innovation or declining business operations to uncontrollable factors rather than to internal looting behavior. In many cases, greater trust and risk tolerance encourage risk-taking and promotion of innovation.

2.2. The Benefits of ESG Ratings

ESG ratings can improve market and government incentives to invest in R&D [53]. ESG ratings of firms have a dual impact: First, they encourage enterprises to increase R&D spending through market-driven incentives. Meanwhile, by improving the transparency of data related to innovative R&D spending, ESG ratings increase the accuracy of capital market valuations, thus facilitating early assessment of the potential market value of a firm and proactive assessment of its current profitability and/or losses due to R&D investment. ESG ratings help to internalize aspects of R&D externalities and effectively stimulate investment in innovation through corporate incentives.

Secondly, ESG ratings of firms encourage stakeholders to take on a supervisory role, which in turn drives companies to increase R&D input [54]. ESG ratings can also establish a positive social image for companies with high ratings, encouraging them to reduce pollution emissions as much as possible; develop healthier, greener products; and build better relationships with customers, employees, and shareholders to enhance their ESG performance. However, the concomitant significant increase in pollution control expenditures forces firms to adopt greener technologies to reduce expenditures and then optimize profits, effectively stimulating demand for green innovation [55]. This demand, in turn, compels enterprises to increase R&D investment.

As society’s understanding of green sustainable development improves and the importance of ESG ratings grows, managements of firms may come to recognize the potential dividends of seemingly expensive R&D expenditures. The Porter hypothesis suggests that the compensatory benefits brought by innovation can exceed the costs of compliance, making enterprises more competitive and better prepared for the transition to a green economy. Hence, the first hypothesis of this study was proposed:

H1. 

ESG ratings can effectively enhance corporate innovative output.

2.3. ESG, Financial Performance, and Corporate Innovation

According to the stakeholder theory, in modern corporations, a principal–agent relationship exists not only between shareholders and managers, but also between managers/shareholders and even other stakeholders (including creditors, suppliers, customers, employees, governments, and the broader community). Effective ESG strategies can improve financing channels and reduce costs. Moreover, ESG disclosure increases corporate transparency about internal ESG practices, creating momentum for managers of firms, investors, and stakeholders to make smarter decisions and assessments. As investors’ reactions to disclosed ESG rating information depend on the quality of that information, not surprisingly, investors would more likely be inclined to respond positively to ESG information when its disclosure is clear [20].

Research has confirmed the positive effects of ESG performance on businesses in terms of enhancing performance and value of firms [56,57]. ESG performance can not only improve information asymmetry both within and outside a company, but can also enhance its long-term value [56,58]. Ashwin et al. [59] confirmed that firms with higher ESG ratings convey more positive signals to the public world, which increases firm value and significantly reduces future financial risk and compliance risk. ESG performance may, however, become a self-serving tool for managers who release false disclosure reports that mask improper management behavior [60]. According to neoclassical economic theory, corporate ESG performance has strong externalities, which may encourage managers to use ESG ratings for self-profit. Therefore, a significant negative correlation may exist between ESG ratings and firm performance. Disclosure of ESG rating information can increase corporate transparency, alleviate information asymmetry, shape a company’s socially responsible image, strengthen the relationship between the firm and various stakeholders, and increase its credibility. Therefore, corporate ESG rating performance may have a significant positive impact on firm performance [5,20].

ESG information disclosure can provide long-term benefits by improving the financial performance of firms and attracting investors who are focused on sustainability. Previous studies highlighted the relevance of ESG rating information disclosure as a strategy for firms seeking to reduce their own carbon footprint and increase their attractiveness to sustainability-oriented investors [61,62]. Xu et al. [63] conducted an in-depth study on the relationship between firm ESG rating scores and stock returns during and after the COVID-19 crisis. Their findings indicated that high ESG rating scores can enhance a firm’s resilience to external shocks, which is especially important in turbulent times [63,64]. Ahmad et al. [22] echoed the view that ESG rating factors are crucial in investors’ investment decisions because they impact financial performance significantly. They called for enhanced environmental and social performance to improve corporate financial outcomes. Overall, these studies collectively emphasized the multifaceted role of ESG rating factors in shaping firm performance and investor decision-making.

He et al. [14] investigated risk mitigation, highlighting the role of ESG rating performance in curbing risky behaviors and encouraging sustainable growth. In their study, they also explored the roles of information transparency, firm governance, and external pressure in moderating the impact of ESG performance on risky behaviors. Zhou et al. [65] explored how ESG rating performance affects the efficiency of green technology-related innovation in Chinese listed enterprises. The results showed a correlation between higher ESG ratings and more efficient green technology innovation. That study’s mechanism analysis revealed that this effect can be realized by relaxing firms’ financial constraints and encouraging enterprises to take on more risk.

Based on signaling theory and voluntary disclosure theory, research demonstrated that companies that proactively fulfill their ESG responsibilities tend to showcase their excellent performance in the ESG arena to the outside world [65,66]. This conveys positive signals of sustainable development to the market, improving investors’ future expectations and willingness to pay higher premiums. Good ESG performance can transmit two positive signals: first, it shows that the company has a strong sense of social responsibility to protect the environment; high ESG ratings may also indicate that the company has effective constraint and supervision mechanisms [67]. In such companies, stakeholders are recognized and their demands are met through responsible management, which demonstrates the company’s capacity for long-term sustainable development and current sound operations.

Compared to underperforming companies, those with high profitability and more assets are more capable of enhancing ESG performance, although investment in ESG brings additional pressure. Active fulfillment of environmental and social responsibilities would convey some signals to stakeholders that firms are trustworthy, thereby reducing transaction costs between the firm and their various stakeholders and improving stakeholders’ participation in creating company value. Investors are often very uncertain about companies that lack non-financial performance information in their decision-making processes. Failure to disclose environmental information, for example, is typically associated with high environmental risk and regulatory costs. The better ESG rating performance, the lower financing costs of firms [49,68], which is one of the reasons why many external investors tend to invest in companies with good ESG performance. Furthermore, companies with high ESG ratings tend to focus on sustainability and long-term corporate interests, which is beneficial for sustainable corporate development. Fulfillment of ESG responsibilities also reflects that management values long-term returns and capital market stability.

In summary, excellent ESG ratings can compensate for disadvantages in terms of information asymmetry, send positive signals, align management actions with stock prices, enhance investor information, improve corporate financial value, and ensure and promote the continuous development of corporate green technology. Therefore, we propose our second research hypothesis:

H2. 

ESG ratings can promote corporate innovation by improving corporate financial performance.

2.4. ESG, Internationalization, and Corporate Innovation

Internationalization refers to expansion of the management of business operations on a global level, and is defined as engaging in product production, sales, and service activities in two or even more countries [69]. The main existence forms of internationalization include export trade, non-equity arrangements, and foreign investment. At present, China is still primarily engaged in export trade, but foreign investment by Chinese enterprises is growing rapidly. At the same time, as China opens up, restrictions on foreign investment are also gradually relaxing; meanwhile, foreign capital is becoming a very important part of China’s opening-up strategy [70]. In the process of internationalization, the contribution of ESG cannot be ignored [27]. The competitive environment created by internationalization demands more than mere economic efficiency. Actively fulfilling social responsibilities can help firms develop unique resources and competitive advantages [71]. Products exported to an international market must meet local entry and various regulatory standards; focusing on ESG performance helps companies to control carbon emissions, improve resource efficiency, and ensure smooth exports. Socially responsible companies pay much more attention to standardization of the entire chain of production, including packaging, logistics, and sales [72].

Import restrictions include a series of laws, regulations, and assessment procedures to ensure local consumer safety and protect the environment. These restrictions effectively constitute green and blue barriers that force exporters to engage in technological innovation and their product upgrades and then strictly control supply chain management, thereby objectively promoting the improvement in ESG rating performance. As for foreign investment, with the internationalization of multinational corporations, the needs of stakeholders are more diverse than ever. Companies must demonstrate good corporate citizenship and establish trust; otherwise, they may face the risk of litigation or sanctions [73]. However, multinational corporations from developing countries may encounter prejudice when entering developed markets. For such companies, active participation in ESG activities as a non-market-oriented strategy can increase understanding, compensate for inadequacies, and ensure acceptance from host governments and the public [74]. Economies of scale and diversified revenue structures can result from the socially responsible governance practices of overseas subsidiaries that take steps to improve ESG management [75].

Various factors influencing corporate R&D have been the focus of academic attention: internal factors such as corporate capabilities [76], corporate resources, and managerial characteristics, as well as external factors such as the host country environment (institutions, culture, and resources) [77], home country environment (government involvement) [78], and others. The findings of previous studies undoubtedly improved our understanding of the internationalization of R&D. However, as attention to social issues has increased in recent years, economically, environmentally, and socially sustainable development has gradually become more and more important, and changes in the international business environment have brought new challenges to firms engaging in transnational R&D. ESG research has provided new insights into ways of solving various problems.

Campbell et al. [79] proposed that engagement in ESG activities is key for multinational enterprises to obtain legitimacy in host countries. Regulations brought about by demands for sustainable development have become increasingly stringent. Thus, ESG plays a vital important role in the process of firm internationalization. Enterprises with good ESG performance have competitive advantages [80,81]. Unlike traditional monopolistic advantages, ESG advantages can provide considerable social value to host countries. Therefore, enterprises with ESG advantages are often warmly welcomed in host countries.

ESG rating systems provided by third-party institutions may compel firms to enhance ESG performance, which is conducive to the internationalization of R&D [1,75]. In many cases, ESG ratings compel enterprises to regulate their ESG behaviors and improve ESG performance through market pressure, thereby legitimizing investment in host countries and promoting the internationalization of R&D. Thus, ESG ratings not only directly promote internationalization, but also help firms to meet the sustainable development requirements of investors, businesses, and governments [49,82]. This can alleviate financing constraints and enhance the willingness to engage in corporate innovation.

Publication of ESG ratings motivates enterprises to innovate. Improved ESG performance according to the ratings publication can attract outstanding R&D talent, ameliorate organizational identity and pride, enhance employee creativity, and increase willingness to engage in innovative activities. Good ratings can also increase the tolerance of stakeholders for corporate risk-taking and managers’ willingness to take risks, thereby promoting corporate innovation. According to the resource dependency theory, firm survival and development requires the acquisition of various resources from the external environment [83,84]. Firms in emerging economies can gain access to multiple resources through internationalization of R&D, increase their learning opportunities from cross-border exchanges with overseas enterprises and partners, and obtain institutional guarantees for their innovative activities. Therefore, we propose the third research hypothesis:

H3. 

ESG ratings can promote innovation by increasing internationalization.

3. Data, Variables, and Methodology

3.1. Sample and Data

Due to the limitations of ESG rating data and corporate patent data, we select Chinese A-share listed enterprises on the Shanghai and Shenzhen stock exchanges from 2009 to 2021 as the research sample. To ensure the accuracy of the data, this paper excludes financial and insurance firms, special treatment companies, and industries with fewer observations in certain years, ultimately obtaining 27,026 firm observations in total. To control for the impact of potential outliers, we trim continuous variables below the 1% and above the 99% of the distribution. Referring to the protocol in previous research [85,86,87,88] in which the number of patents was used as a measure of corporate innovation, we source corporate patent data from the China Research Data Service Platform. In addition, with the emergence of major sustainable development rating agencies and reliable ESG databases in recent years, more and more firms have begun to accept assessments, either actively or passively [89]. However, differences in assessment methods and algorithms by various agencies may not only lead to great deviation in ESG scores or ratings [31,90], but also possibly exaggerate the non-financial risks to enterprises [91]. Furthermore, factors such as company size [89], enterprise digitalization [8], environmental protection laws [6], and social media attention [92] may affect the results of analyses using ESG rating data. Therefore, in consideration of the study period and coverage of various ESG rating agencies, we adopt the ESG rating data from the Huazheng Index as the proxy variable for firm ESG performance. The Huazheng Index has been assessing the ESG rating performance of A-share issuers and bond issuers since 2009, and it now covers all A-share listed enterprises in China. The Index has received wide recognition from the industry and academia [67,93,94,95]. Huazheng ESG rating data were therefore acquired from the Wind Information Financial Terminal, and other company-level financial data and industry data were obtained from the China Stock Market & Accounting Research database.

3.2. Formatting of Mathematical Components

To test the hypotheses about the effects of ESG rating performance on innovation in Chinese listed enterprises, we draw on the research ideas of [13] and [13,45] to construct the following model:

$$Innovatio{n}_{i,t}={\beta }_0+{\beta }_{1}ES{G}_{i.t}+{\beta }_{2}Contro{l}_{i,t}+Year+Industry+{\epsilon }_{i,t}$$

(1)

where subscripts i and t represent the research sample individual and year, respectively, and the dependent variable (Innovation) represents the level of corporate innovation. However, the number of all three types of patents (utility, design, and plant patents) for which listed companies applied independently, namely, invention patents (Patent), is used as the first measure of the level of corporate innovation. Generally, invention patents are considered to be the most original among the types of patents; therefore, the number of utility model patents (Invention1) and the number of design patents (Invention2), both of which we take as the natural logarithm, are used as other measures of corporate innovation. In addition, we use the logarithm of typical R&D expenses as another measure of innovation. The independent variable (ESG) is the ESG rating from the Huazheng Index; a higher rating indicates better ESG performance. In the Huazheng Securities ESG ratings, all listed companies are classified into 9 levels from low to high, as follows, C, CC, CCC; B, BB, BBB; and A, AA, AAA, consistent with the classification of [33]. Therefore, we rank the ESG rating scores of listed enterprises from low to high with values from 1 to 9, with larger numbers indicating a more pronounced ESG advantage. Based on the results of our analysis, we expect the regression coefficient $\beta$ to be significant and positive, meaning that the corporate ESG rating performance of a given firm has a significant positive effect on its level of firm innovation.

To mitigate the impact of omitted variables, we refer to some related literature to include in the model a number of control variables at the listed company level [96], as follows: log-transformed company age (Age) [40,97,98], equity concentration (Big1) [94,99], cash holdings (Cash) [69,92,100,101], CEO duality (Duality) [97,102,103], whether the chairman and general manager of enterprises hold dual positions (Duality) [104,105], the proportion of fixed assets (Fixratio) [14,106], firm growth rate (Growth) [106,107], industry competitiveness (HHI) [108,109], the proportion of independent directors (Indirector) [98,110], leverage (Leverage) [69,111,112], the management shareholding ratio (Manager) [113,114], the market-to-book ratio (MTB) [115,116], and corporate size (Size) [40,94,117]. To control the effects of industry and macroeconomic conditions on the level of firm innovation, two dummy variables (Industry and Year) are added in the model, with ε representing the random error term. Specific definitions of the research variables are shown in

Table 1. Variables used in this study.

Type	Variable	Measure
Dependent Variable	Patent	Logarithm of the number of invention patent
	Invention1	Logarithm of the number of utility model patent
	Invention2	Logarithm of the number of design patent
	R&D	Logarithm of research and development expenses
Independent Variable	ESG	Logarithm of ESG rating data published by Huazheng
Control Variables	Age	Number of years since firm establishment
	Big1	Proportion of shares of the largest shareholder
	Cash	Logarithm of cash holdings
	Duality	If the firm CEO and Chairman of the Board are the same person, denoted 1; otherwise, 0
	Fixratio	Fixed assets/total assets
	Growth	Average annual growth
	HHI	Market concentration rate
	Indirector	Proportion of independent directors
	Leverage	Total debt/total assets
	Manager	Executive ownership ratio
	MTB	Book-to-market equity ratio
	Sub	Number of subsidiaries
	Year	Dummy variable based on research years
	Industry	Industry dummy variable

, and their descriptive statistics are reported in

Table 2. Descriptive statistics of variables.

Variable	Mean	SD	Min	p25	p50	p75	Max
ESG	4.088	1.015	1.250	3.500	4.000	5.000	6.000
Patent	2.419	1.404	0.000	1.386	2.398	3.296	6.390
Invention1	1.872	1.341	0.000	0.693	1.792	2.708	5.903
Invention2	2.027	1.339	0.000	1.099	1.946	2.890	5.781
R&D	17.758	1.574	13.160	16.849	17.781	18.701	21.865
Age	11.260	7.376	1.000	5.000	10.000	17.000	28.000
Big1	34.576	14.932	8.570	23.000	32.320	44.790	74.820
Cash	0.166	0.132	0.010	0.073	0.128	0.219	0.659
Duality	0.270	0.444	0.000	0.000	0.000	1.000	1.000
Fixratio	0.214	0.164	0.002	0.086	0.181	0.307	0.703
Growth	1.392	1.057	0.316	0.974	1.135	1.420	8.666
HHI	0.149	0.143	0.033	0.058	0.101	0.201	0.863
Indirector	0.378	0.064	0.250	0.333	0.364	0.429	0.600
Leverage	0.444	0.202	0.062	0.286	0.441	0.595	0.895
Manager	12.991	19.550	0.000	0.000	0.350	23.407	68.091
MTB	0.296	0.158	0.017	0.180	0.271	0.390	0.765
Sub	20.180	25.408	1.000	6.000	12.000	23.000	158.000

.

4. Results

4.1. Benchmark Regression Analysis

Table 3. Results of benchmark regression analysis.

Variable	Patent	Invention1	Invention2	R&D
ESG	0.268 ***	0.267 ***	0.207 ***	0.314 ***
	[13.785]	[13.295]	[10.092]	[17.323]
Age	0.014 ***	0.018 ***	0.011 **	0.014 ***
	[3.035]	[4.006]	[2.247]	[3.588]
Big1	0.004 ***	0.003 **	0.005 ***	0.008 ***
	[2.681]	[2.303]	[3.172]	[5.392]
Cash	0.376 **	0.375 **	0.331 *	0.487 ***
	[2.126]	[2.031]	[1.748]	[3.039]
Duality	−0.027	0.026	−0.014	−0.018
	[−0.633]	[0.574]	[−0.288]	[−0.520]
Fixratio	−0.232	−0.377 *	0.079	−0.124
	[−1.222]	[−1.865]	[0.410]	[−0.677]
Growth	−0.047 **	−0.023	−0.069 ***	−0.059 ***
	[−2.261]	[−1.039]	[−3.458]	[−3.212]
HHI	0.337	0.158	0.185	0.686 ***
	[1.608]	[0.742]	[0.814]	[3.578]
Indirector	0.0854	0.173	0.0391	−0.185
	[0.318]	[0.608]	[0.142]	[−0.722]
Leverage	0.885 ***	0.796 ***	1.108 ***	1.226 ***
	[5.897]	[5.087]	[7.251]	[8.931]
Manager	0.00006	−0.0004	−0.0006	−0.0024**
	[0.048]	[−0.292]	[−0.466]	[−2.359]
MTB	0.199	−0.0681	0.600 ***	0.496 ***
	[1.281]	[−0.410]	[3.672]	[3.445]
Sub	0.009 ***	0.009 ***	0.007 ***	0.017 ***
	[6.716]	[7.157]	[5.205]	[17.313]
Constant	0.081	−0.410 **	−0.166	13.93 ***
	[0.422]	[−2.004]	[−0.817]	[73.178]
N	15044	13690	11764	20469
adj. R2	0.251	0.201	0.246	0.401
Year FE	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes

Note: t-statistics values are in parentheses; * means p < 0.1, ** means p < 0.05, and *** means p < 0.01.

reports the results of the benchmark regression analysis of the impact of ESG rating performance on the level of corporate innovation, with all regressions controlling for industry and year fixed effects. Column 2 of Table 3 presents that the coefficient of the ESG variable is 0.268, which is significant at the 1% level, showing that one unit increase in the ESG rating leads to an average increase of about 26.8% for the number of patent applications for inventions. This finding provides preliminary empirical evidence for our first hypothesis (H1). When the dependent variable is replaced with the number of utility model patents (Invention1) and the number of design patents (Invention2), the absolute values of the ESG coefficient are slightly reduced (to 0.267 and 0.207, respectively), but both remain significant at the 1% level. When firm R&D expenditure is considered, the coefficient increases slightly to 0.314, which is also significant at the 1% level. This indicates that the impact of ESG rating performance on the level of corporate innovation is primarily due to invention patents and corporate R&D input. Therefore, we can conclude that higher ESG ratings significantly facilitate improvement in innovation in the enterprises included in our sample during the study period.

4.2. Robustness Test

4.2.1. Sample Selection

To prove the reliability of our benchmark regression results and demonstrate that the results are not random, we exclude data from before 2013 (which is relatively old) and after 2019 (the COVID-19 pandemic) and conduct the regression analysis again. The results, which are still quite robust, are reported in

Table 4. Analysis of the years from 2013 to 2018.

Variable	Patent	Invention1	Invention2	R&D
ESG	0.274 ***	0.277 ***	0.209 ***	0.253 ***
	[10.099]	[10.060]	[7.289]	[6.000]
Controls	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes
N	7194	6604	5702	7141
adj. R2	0.241	0.192	0.25	0.287

Note: t-statistics values are in parentheses; *** means p < 0.01.

.

4.2.2. Reconsidering Lag Effects

In the benchmark regression analysis, the dependent variables were patent application data and R&D expenditure data in the current period. However, the possibility that some R&D projects progress faster or slower than others cannot be excluded, and the impact of ESG on different projects may also vary. To avoid endogeneity problems due to mutual causation, following the protocol in previous research, we employ data for the dependent variable for the t + 1 period, while taking data for the independent and control variables from the t period. After re-running the regression according to the model (2), we report the results in

Table 5. Dependent variable one period ahead.

Variable	Patent	Invention1	Invention2	R&D
ESG	0.266 ***	0.268 ***	0.195 ***	0.314 ***
	[12.794]	[12.581]	[8.868]	[16.151]
Controls	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes
N	13,335	12,178	10,391	18,660
adj. R2	0.252	0.204	0.244	0.386

Note: t-statistics values are in parentheses; *** means p < 0.01.

; the conclusions remain unchanged.

$$Innovatio{n}_{i,t+1}={\beta }_0+{\beta }_{1}ES{G}_{i.t}+{\beta }_{2}Contro{l}_{i,t}+Year+Industry+{\epsilon }_{i,t}$$

(2)

4.2.3. Analysis Using Other Methods

To verify the robustness of the benchmark regression analysis results of this study, referring to the research by [118,119], we use the generalized least squares (GLS) method to re-regress the variables of interest. GLS not only mitigates endogeneity problems but also makes the conclusions of this paper more reliable. Following the model, the data results are regressed, and the results, which are highly consistent with those of the benchmark regression analysis, are reported in

Table 6. Panel GLS method.

Variable	Patent	Invention1	Invention2	R&D
ESG	0.253 ***	0.254 ***	0.185 ***	0.267 ***
	[21.395]	[21.571]	[14.293]	[25.787]
Constant	0.625 ***	0.213 **	0.247 **	16.23 ***
	[5.843]	[2.000]	[2.097]	[167.448]
N	15,044	13,690	11,764	20,469
AIC	52,191.7	46,112.3	39,934.3	73,716.8
BIC	52,298.3	46,217.6	40,037.5	73,827.8

Note: t-statistics values are in parentheses; ** means p < 0.05 and *** means p < 0.01.

.

4.3. Endogeneity Issues

This section discusses potential endogeneity issues in our analysis. Such issues may be caused by three fundamental factors [120]: (1) omitted variables, meaning that in addition to the variables in the explanatory variable set, other variables provide additional or extra explanation for the relationship under study; (2) simultaneity, meaning that when the dependent variable and one or more explanatory variables are jointly determined, the causal relationship is most likely bidirectional; and (3) measurement error, which occurs when proxy variables are used for independent or dependent variables that cannot be observed or are difficult to quantify. If any of these three factors exist, variable measurement will be correlated with the error term, thereby causing bias in the coefficients. We therefore use current data to explore the impact of ESG rating performance on corporate innovation and conduct a robustness check using the lagged dependent variable, which can to some extent resolve endogeneity issues arising from reverse causality. To address potential endogeneity issues in the model, we construct instrumental variables. Past researchers often used industry- or regional-average ESG rating performance as an instrumental variable to represent firm ESG ratings [121], or industry- and regional-average ESG ratings as the instrumental variable representing corporate ESG performance. In this study, we select the ESG rating data of other enterprises in the same industry within the same province as the instrumental variable and address endogeneity issues using the two-stage least squares method. The ESG rating performance of a given firm in the same province and industry in the same year is significantly associated with the ESG rating performance of the firm itself; improved ESG rating performance of other enterprises will compel other firms to enhance their ESG rating performance, thus satisfying the relevance condition.

In

Table 7. Average ESG rating performance in the same industry and province in the same year.

Variable	ESG	Patent	ESG	Invention1	ESG	Invention2	ESG	R&D
IV	0.915 ***		0.918 ***		0.909 ***		0.939 ***
	[52.860]		[50.220]		[49.580]		[68.040]
ESG		0.245 ***		0.214 ***		0.202 ***		0.389 ***
		[6.649]		[5.671]		[5.463]		[11.379]
Kleibergen–Paap rk LM statistic	436.556		394.595		347.423		591.308
Cragg-Donald Wald F statistic	4674.558		4140.642		3693.67		7566.148
Kleibergen–Paap Wald rk F statistic	2794.158		2521.605		2458.115		4629.53
N	15,044	15,044	13,690	13,690	11,764	11,764	20,469	20,469
adj. R2	0.2554	0.251	0.2056	0.2	0.2056	0.246	0.4015	0.399
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

Note: t-statistics values are in parentheses; *** means p < 0.01.

, columns (2), (4), (6), and (8) show the results of the first-stage regression. The coefficient of IV is positive and significant, which confirms the relevance of the instrumental variable. The Cragg-Donald Wald F statistic indicates that there are no problems such as weak instrumental variables or over-identification. Columns (3), (5), (7), and (9) of Table 7 show that the results of the second-stage regression are consistent with the baseline results. Therefore, we conclude that an improvement in ESG ratings can enhance corporate innovation. To ensure the validity of the instrumental variable, we conduct the Kleibergen–Paap rk LM test for under-identification and the Kleibergen–Paap rk Wald F test for weak instrumental variables. The results pass the validity test (Table 7). Results of the two-stage least squares regression shown in columns (2), (4), (6), and (8) of Table 7 indicate that the results of the first-stage instrumental variable regression have F values greater than the empirical value of 10 and are significant at the 1% level. Thus, we conclude that the instrumental variables are valid. The results of the second-stage regression are still significant at the 1% level, indicating that no obvious endogeneity issues are evident, and therefore the results are relatively robust.

5. Heterogeneity Test

5.1. Firm Size

Firm size is also an important factor affecting a company’s innovative capability. Large firms have potential advantages in terms of personnel, capital, and technology reserves, but they also face issues of institutional and personnel redundancy, reduced employee enthusiasm, and inefficiency in innovation. High ESG ratings in large firms aid in attracting socially responsible, innovative talent and improving the human capital structure of enterprises, thereby enhancing innovation efficiency. Implementation of ESG must be thoroughly integrated with business strategy, functional strategy, and operational systems. In fact, it requires substantial investment of resources for overall planning in the short term, and continuous innovation and risk prevention in the medium to long term, which larger firms are equipped to handle. In addition, their slack resources provide greater flexibility for strategic and sustainable investment [122], enabling them to offer sufficient support for ESG activities and reducing the risk of discontinuing or interrupting those activities.

Defining the smallest 30% of the Chinese listed companies in our sample as small firms and the largest 30% as large firms, we now re-estimate model (1). The results in

Table 8. Big and small firms.

Variable	Patent		Invention1		Invention2		R&D
	Small	Big	Small	Big	Small	Big	Small	Big
ESG	0.126 ***	0.264 ***	0.0986 ***	0.281 ***	0.0884 ***	0.181 ***	0.118 ***	0.292 ***
	[4.481]	[7.146]	[3.503]	[7.360]	[3.056]	[4.948]	[5.383]	[9.708]
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	3733	4457	3308	4121	2753	3763	5024	6447
adj. R2	0.149	0.341	0.056	0.318	0.138	0.347	0.319	0.501

Note: t-statistics values are in parentheses; *** means p < 0.01.

show that when the explanatory variable is the sum of patent counts, the ESG coefficient for small firms is 0.126, while that for big firms is 0.264; both values are significant at the 1% level. Furthermore, when the explanatory variable is replaced with the number of invention patent applications and the number of invention patents ultimately granted, this difference remains significant. When the dependent variable is replaced with the number of utility model patents (Invention1), the number of design patents (Invention2), and corporate R&D expenditure, this difference remains significant. Therefore, we assert that as firm size increases, the role of ESG in promoting a firm’s innovative capability becomes more pronounced.

One possible explanation is that, due to listing requirements, companies that meet the conditions for listing on the A-share market inherently possess certain economies of scale, are more profitable, and have better cash flows. Compared to other small- and medium-sized enterprises, such listed companies have access to various financing channels and are much less likely to be restricted by financing issues. Correspondingly, engagement in ESG activities can alleviate the principal–agent problem in large enterprises. Organizational identification and employee satisfaction can be increased through involvement in ESG activities, which benefits corporate innovation. By leveraging the responsible social image resulting from such involvement, listed companies can also attract high-quality talent with a sense of social responsibility, improve their human capital structures, and enhance corporate efficiency in their innovation efforts.

5.2. Property Rights Attributes

Due to differences in property rights, ways of improving ESG performance will vary between enterprises. The main motives for private enterprises, or non-state-owned enterprises (non-SOEs), to enhance ESG performance are to improve corporate image, maximize company value, and increase economic benefits. By contrast, state-owned enterprises (SOEs), apart from economic benefits, must also complete government-assigned tasks and carry various social responsibilities. Thus, improvement in ESG performance for these firms is not entirely driven by profit maximization. Governments, investors, and the public expect SOEs to perform better than non-SOEs in terms of fulfilling their environmental and social responsibilities. As the demand for sustainable development increases, SOEs become important tools by which governments promote higher-quality development. Therefore, compared to non-SOEs, SOEs may have to face stricter environmental regulatory pressure and supervision from the market. We now test the impact of property rights attributes on the relationship between ESG rating performance and corporate innovation.

In fact, SOEs generally have more severe principal–agent problems, and R&D projects have higher sunk costs and possibilities of failure, than private enterprises. Due to personal interests and political factors, management may be unwilling to take risks for the purpose of innovation. Engagement in ESG activities can improve the governance structures of SOEs and increase the willingness of management to take risks. In recent years, in response to the demand for green development of the public, the goal of the political assessment of government officials has gradually shifted from economic development to comprehensive consideration of numerous socio-economic factors. Improved ESG performance in SOEs can, to a certain extent, offset the economic impacts of innovation failure, creating a more tolerant environment for innovation in SOEs [123].

Based on the property attributes of actual controllers, we then divide the sample enterprises into SOEs and non-SOEs to re-estimate the benchmark model. The results in

Table 9. State-owned and non-state-owned enterprises.

Variable	Patent		Invention1		Invention2		R&D
	Non-SOEs	SOEs	Non-SOEs	SOEs	Non-SOEs	SOEs	Non-SOEs	SOEs
ESG	0.234 ***	0.298 ***	0.226 ***	0.303 ***	0.179 ***	0.253 ***	0.262 ***	0.372 ***
	[10.453]	[7.982]	[9.620]	[7.861]	[7.451]	[6.889]	[12.684]	[10.739]
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	9711	5023	8799	4601	7538	3993	12,887	7170
adj. R2	0.193	0.358	0.132	0.315	0.206	0.367	0.368	0.485

Note: t-statistics values are in parentheses; *** means p < 0.01.

show that ESG has a more significant promotional effect on innovation in SOEs compared to non-SOEs. One possible explanation is that, facing intense market competition and desiring to maintain a competitive edge, non-SOEs may be more willing to innovate [33]. Unlike other small- and medium-sized non-SOEs, SOEs have access to equity and bond financing to obtain the necessary financial support, which may limit the impact of ESG rating performance on innovation in non-SOEs.

5.3. Regional Analysis

We now conduct a regression analysis with China divided into eastern, central, and western regions (

Table 10. Regional differences.

Variable	Patent			Invention1			Invention2			R&D
	East	Central	West	East	Central	West	East	Central	West	East	Central	West
ESG	0.290 ***	0.241 ***	0.173 ***	0.298 ***	0.215 ***	0.146 ***	0.219 ***	0.188 ***	0.158 ***	0.296 ***	0.276 ***	0.326 ***
	[12.834]	[5.125]	[3.557]	[12.764]	[4.669]	[2.949]	[9.089]	[3.868]	[2.985]	[14.848]	[6.083]	[5.830]
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	11,004	2291	1749	10,052	2064	1574	8599	1866	1299	14,889	2994	2586
adj. R2	0.247	0.351	0.331	0.208	0.292	0.278	0.246	0.339	0.336	0.421	0.449	0.452

Note: t-statistics values are in parentheses; *** means p < 0.01.

). When the dependent variables are Patent, Invention1, and Invention2, the coefficients of ESG ratings all show a gradually decreasing trend from the eastern to the central and western regions, and all are significant at the 1% level. It can be concluded that compared to firms in the eastern region, the ESG advantage promotes innovation in central and western enterprises to a greater extent. Possible reasons are as follows: the eastern region is more economically developed, faces less financing pressure compared to the central and western areas of the country, and has a higher tax burden. For tax avoidance purposes, enterprises in the east are more inclined to reduce financing costs by enhancing ESG performance. In addition, the eastern region of China, with its well-developed institutional framework and mature capital market, has a higher concentration of talent and prioritizes corporate ESG performance. However, in central and western areas, with their relatively lagging economic development, poor marketization, and weaker government regulation, local governments and enterprises may prioritize economic development rather than ESG performance in high-quality enterprise development. Limited by the level of overall economic development and lack of financial marketization, enterprises in these regions may find internationalization challenging compared to those in the eastern region. In addition, in the western region, the impact of ESG rating performance on firm R&D expenses is great. This may be primarily due to the relatively small proportion of R&D investment in enterprises in the western region.

5.4. Industry Analysis

Due to significant differences in production and business operations, service models, and other factors between manufacturing and non-manufacturing enterprises, concerns fluctuate and financial investment in ESG activities varies, which may lead to different impacts on innovation in the firms in our sample. To determine this, we further divide the sample firms into two groups according to manufacturing and non-manufacturing industries to examine differences in the impact of ESG on innovation using Equation (1), the results of which are reported in

Table 11. Manufacturing and non-manufacturing firms.

Variable	Patent		Invention1		InveIntion2		R&D
	Manu	Non-Manu	Manu	Non-Manu	Manu	Non-Manu	Manu	Non-Manu
ESG	0.280 ***	0.234 ***	0.269 ***	0.245 ***	0.226 ***	0.155 ***	0.317 ***	0.293 ***
	[11.599]	[7.436]	[10.635]	[7.706]	[8.774]	[4.925]	[14.625]	[10.003]
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	9325	5719	8365	5055	7429	4335	11,591	8878
adj. R2	0.269	0.228	0.206	0.219	0.241	0.268	0.426	0.382

Note: t-statistics values are in parentheses; *** means p < 0.01; Manu represents manufacturing, non-Manu represents non-manufacturing.

. The coefficients of results reveal that regardless of whether the dependent variable is Patent, Invention1, Invention2, or R&D, the ESG coefficients for manufacturing firms is higher than that for non-manufacturing firms. This indicates that innovation and development in firms in the manufacturing industry are more evident and more clearly correlated with ESG ratings.

5.5. Three Sub-Components

Huazheng ESG ratings are composed of three sub-components: an environmental rating score (E), a social rating score (S), and a governance rating score (G). Therefore, in this section, we use the three dimensions of the Huazheng ESG score as independent variables to explore the impact of ESG rating scores on firm innovation.

Table 12. Three sub-components.

Variable	Patent	Patent	Patent	Invention1	Invention1	Invention1	Invention2	Invention2	Invention2	R&D	R&D	R&D
ESG-E	1.757 ***			1.642 ***			1.292 ***			1.851 ***
	[10.643]			[9.451]			[7.642]			[12.025]
ESG-S		1.406 ***			1.374 ***			1.114 ***			1.786 ***
		[10.155]			[9.711]			[7.500]			[13.732]
ESG-G			1.547 ***			1.606 ***			1.192 ***			1.995 ***
			[8.501]			[8.686]			[5.933]			[11.991]
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year Fe	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry Fe	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	15,044	15,044	15,044	13,690	13,690	13,690	11,764	11,764	11,764	20,469	20,469	20,469
adj. R2	0.241	0.235	0.229	0.188	0.183	0.179	0.238	0.236	0.232	0.383	0.384	0.377

Note: t-statistics values are in parentheses; *** means p < 0.01.

shows the results of the estimation, revealing that environmental, social, and governance rating scores enhance corporate innovation in the firms in our study sample.

6. Mediation Tests

6.1. Financial Efficiency

In the process of implementing ESG, enterprises enhance their environmental protection capabilities through technological innovation, increasing human capital, improving employee compensation, increasing work efficiency, improving corporate governance mechanisms, and reducing agency costs. Costs and efficiency are important factors affecting profits. However, enterprises with better ESG performance may receive support from stakeholders in the form of access to required external resources, thereby improving corporate financial efficiency. Increased financial efficiency can bring about a variety of economic consequences, such as rapid technological progress, increased product added value, improved market competitiveness, increased economic benefits, reduced production and operational costs, and higher profits. Therefore, we assert that corporate financial performance plays a mediating role in the positive effect of ESG on firm innovation. Alleviating the principal–agent problem typical of listed companies, improving employee welfare, creating enthusiasm for innovation, and increasing corporate innovation efficiency are all mechanisms through which ESG promotes corporate innovation. By building a socially responsible image based on ESG, enterprises can attract high-quality employees with public consciousness, thus improving the level of human capital.

We now further analyze the impact of ESG ratings on innovation efficiency using Equations (3) and (4). ROA means net profit divided by total assets.

$$RO{A}_{i,t}={\xi }_0+{\xi }_{1}ES{G}_{i.t}+{\xi }_{2}Contro{l}_{i,t}+Year+Industry+{\epsilon }_{i,t}$$

(3)

$$Innovatio{n}_{i,t}={\kappa }_0+{\kappa }_{1}ES{G}_{i.t}+{\kappa }_{2}RO{A}_{i,t}+{\kappa }_{3}Contro{l}_{i,t}+Year+Industry+{\epsilon }_{i,t}$$

(4)

These equations test whether the coefficients ${\xi }_1$, ${\kappa }_1$, and ${\kappa }_2$ are greater than 0 and therefore statistically significant. The results are reported in

Table 13. Financial efficiency.

Variable	ROA	Patent	Invention1	Invention2	R&D	ROE	Patent	Invention1	Invention2	R&D
ESG	0.00907 ***	0.228 ***	0.230 ***	0.173 ***	0.218 ***	2.267 ***	0.239 ***	0.238 ***	0.179 ***	0.266 ***
	[15.997]	[11.200]	[10.857]	[8.183]	[12.357]	[18.580]	[12.565]	[12.045]	[9.006]	[15.212]
ROA		3.461 ***	3.155 ***	3.444 ***	4.628 ***
		[10.242]	[9.125]	[9.464]	[17.524]
ROE							0.0147 ***	0.0138 ***	0.0142 ***	0.0214 ***
							[10.168]	[9.304]	[8.826]	[18.424]
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry Fe	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	21,636	13,511	12,356	10,593	17,956	24,847	15,036	13,682	11,761	20,455
adj. R2	0.278	0.269	0.218	0.267	0.446	0.162	0.264	0.213	0.258	0.428

Note: t-statistics values are in parentheses; *** means p < 0.01.

; based on the results, our H2 is supported.

6.2. Internationalization

ESG advantage can enhance a company’s core competitiveness in overseas markets by stimulating innovation. Previous studies suggested that innovation plays a crucial promotional role in a firm’s overseas operations [124]. Endogenous growth theory states that corporate innovation can enhance a company’s export competitive advantage not only by reducing costs and optimizing supply chain management, but also by aiding digital transformation to improve export resilience [125]. Moreover, with the widespread acceptance of the importance of sustainable development, consumers are increasingly leaning towards environmentally friendly products; this environmental intention is clearly influenced by product innovativeness. Thus, shaping ESG advantage could help companies drive technological progress. Specifically, ESG can increase employee enthusiasm for innovation. Costs, cycles, and uncertainty, general characteristics of innovative activities, reduce R&D motivation and discourage investment. ESG, which emphasizes sustainable development and the growth of long-term value, can help companies correct shortsighted behavior and activate innovative thinking about providing targeted innovative products and services to meet consumers’ green preferences. The ESG advantage can also make innovation incrementally effective by not only improving the quantity and quality of innovation, but also by guiding peer companies to actively engage in green innovative activities through the spillover effect. Overall, the innovative consciousness and technological progress shaped by ESG advantage ultimately translates into product competitiveness, thereby helping companies to stand out in the face of fierce international market competition.

$$DO{I}_{i,t}={\psi }_0+{\psi }_{1}ES{G}_{i.t}+{\psi }_{2}Contro{l}_{i,t}+Year+Industry+{\epsilon }_{i,t}$$

(5)

$$Innovatio{n}_{i,t}={\zeta }_0+{\zeta }_{1}ES{G}_{i.t}+{\zeta }_{2}DO{I}_{i,t}+{\zeta }_{3}Contro{l}_{i,t}+Year+Industry+{\epsilon }_{i,t}$$

(6)

We now utilize Equations (5) and (6) to test whether the coefficients ${\psi }_1$, ${\zeta }_1$, and ${\zeta }_2$ are greater than 0 and therefore statistically significant. DOI means foreign sales divided by total sales. The results are reported in

Table 14. Internationalization.

Variable	DOI	Patent	Invention1	Invention2	R&D
ESG	0.263 ***	0.248 ***	0.245 ***	0.191 ***	0.232 ***
	[7.968]	[11.292]	[10.667]	[8.263]	[12.938]
DOI		0.116 ***	0.116 ***	0.104 ***	0.203 ***
		[8.663]	[8.205]	[7.096]	[18.790]
Controls	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes	Yes
N	14,980	11,053	10,193	8884	14,007
adj. R2	0.283	0.27	0.223	0.251	0.487

Note: t-statistics values are in parentheses; *** means p < 0.01.

; based on the results, our H3 is supported.

7. Conclusions

7.1. General Summary and Recommendations

In recent years, with the difficulties arising from various social and environmental issues, sustainable development has become an increasingly important topic worldwide, and more attention has been paid to sustainable development in many countries. ESG business practices are receiving close attention from governments, the public, and other stakeholders, which has an undeniable impact on the daily operations of companies. In this paper, we use patent data from Chinese A-share listed enterprises from 2009 to 2021 to explore the relationship between ESG rating performance and firm innovative output. In addition, we also explore the underlying mechanisms of this relationship. The results are as follows. Firstly, good ESG performance significantly enhances a company’s innovative output, especially in large firms and SOEs. Geographically, ESG performance has a much more pronounced effect on promoting innovative output in eastern enterprises (except for innovation output measured by R&D). ESG rating performance is also more effective in promoting innovation in the manufacturing industry. Secondly, from the perspective of the mediation tests, positive ESG rating performance promotes corporate innovation by increasing financial efficiency and accelerating the internationalization process. This is because sound ESG practices convey a responsible social image, enhance revenue levels, and increase investment. In addition, firms engaging in ESG activities may draw on the experience of firms and other countries in the international market, breaking through development constraints. ESG also reduces principal–agent conflicts and helps enterprises obtain key resources to support innovation. Thirdly, high ESG ratings not only increase innovative output, but also enhance the quality of innovative products. Thus, firms can achieve better quantity and quality. ESG also plays a promotional role in R&D investment, resulting in more innovative output. Based on these findings, we now make the following relevant recommendations.

(1) Listed companies must be actively encouraged to take on social responsibilities by increasing investment in the ESG domain. With the growing interest in sustainability, a company’s ESG commitment has become an important focus for investors. Studies have shown that establishing a robust ESG program helps to build a responsible corporate image and lays a solid foundation for improvement in business performance, increasing trust during difficult times and promoting innovative development. ESG information must be openly and transparently disclosed in response to the demand for sustainable development. Specialized departments must be established to recommend ESG workers, conduct self-risk leveling and control activities according to ESG requirements, and create ESG performance assessment systems. Regulatory bodies should require the inclusion of ESG in the core agenda of corporate strategy as one of the criteria for evaluating SOEs, developing a diversified evaluation system. This would not only encourage enterprises to take appropriate risks to promote innovation, but would also create an environment for both private firms and SOEs to push for high-quality and sustainable economic development.

(2) Policy support must be provided for those enterprises that excel in ESG to transform advantages in social responsibility into innovation advantages. Considering that high-risk innovative projects often require long-term investment, many enterprises face financing difficulties. In addition, corporate innovation relies on the professional knowledge and innovative capacity of employees; therefore, employee motivation is key to successful corporate innovation. Some solutions to these problems may include implementing differentiated and refined financial policies for enterprises with various ESG scores to guide the effective allocation of resources; rewarding enterprises of different types, sizes, and industries with excellent ESG performances and publicizing their success to set an example; offering preferential rates to those companies with outstanding ESG performance to support the financing of environmental projects, establish a new capital market ecosystem, and optimize tax policies to reduce labor costs, thereby accelerating the formation of talent advantages.

(3) Mandatory standardization of ESG information disclosure must be implemented to improve the transparency and quality of ESG rating information for listed companies. At present, disclosure of ESG rating information by listed companies is mostly voluntary, and no unified standards and mechanisms are available to ensure the truthfulness of information. Although more and more firms have begun to disclose relevant information, several issues persist related to exaggerated or untrue descriptions, causing uncertainty about ESG performance. Studies showed that this uncertainty can weaken the promotional effect of ESG on innovation [126]. Therefore, establishing a mandatory ESG information disclosure system and strengthening market regulation is very important. Fair and authoritative rating agencies could respond to investors’ preferences for green investment, while a well-developed disclosure and regulatory system could increase market information transparency and improve resource allocation efficiency in the capital market. In this way, strong support for ESG development could be provided to listed companies.

7.2. Limitations of This Research

Although we used multiple variables and various robustness checks and employed instrumental variables to mitigate endogeneity issues, data from the Huazheng ESG rating Index used in this paper may have some biases due to differences in the rating criteria and methods among different companies. The firms included in our analysis are in China, where the proportion of SOEs is relatively high; therefore, the findings of our study may have certain limitations. Future studies could use a broader set of indicators to conduct comparative research on the impact of ESG rating performance on innovation in developing countries extending to areas such as green finance, bonds, and corporate financing.